Prefer to listen? Check out our podcast episode, ‘When “Free” Financial Planning Isn’t Exactly Free‘! Looking for more? You can find our archive of Money & Taxes from Bb to XYZ episodes on our podcast page.

Since you’re here on the FPFoCo site, you might not be aware that some financial plans are built with the purpose of selling investment or insurance products. Although they can sometimes help your finances, these plans aren’t created solely in your best interest with the intent to get you to your goals. They’re also not paid for via a transparent financial planning fee. Instead, they come in the form of free financial advice.

While it sounds great, free financial plans aren’t exactly free. That’s because many are made specifically to steer you toward purchasing an insurance or investment product. And when you buy that product, the person selling it to you very likely gets a big commission or kickback. And that’s how the salesperson can offer you a “free” financial plan: Because they receive a form of pay when you ultimately buy what they’re selling — whether you actually need it or not.

The real downside is that the “free” financial advice they gave you could end up costing you. Not only does it take your time and effort to work with someone who may have their own bottom line in mind all the while, but that product might also turn out to be a dud that could harm your financial position. The person who created your plan may then move on to the next free financial plan for their next customer, and you could be left with an insurance or investment product that you might not have needed in the first place.

From annuities to permanent life insurance and fee-heavy investments, we’ll review some examples of products that you might want to avoid. They all come with pros and cons. And even if you’ve already purchased one, fixes exist for each as well.

Permanent Life Insurance

Permanent insurance comes in a few varieties, including life and long-term care. They can certainly be great in the right situations … but detrimental when not used properly.

Take permanent life insurance. It’s often positioned as a way to insure yourself for life with the added benefit of investment growth. In the right circumstances, it’s a great estate planning tool that can guarantee that a certain amount of money is passed onto your beneficiaries at your death. But it’s important to ask yourself if you really need expensive permanent life insurance — or life insurance at all — and if the growth is all it’s cracked up to be.

If you need life insurance,  you might not need to purchase permanent life insurance. That’s simply because you may be able to achieve the coverage you need for an affordable price with term life insurance. Plus, some term life insurance policies are convertible to whole life, in case it ends up being the better option for you. Plus, the money you save on premiums with term coverage can be better invested elsewhere to diversify your investments.

In addition to being pricey, permanent life insurance also comes with two sets of growth projections. If you’ve ever seen an illustration of a permanent life insurance policy, you’ll notice that there are guaranteed projections and non-guaranteed or current projections. The guaranteed projections are just that: Guaranteed. Since they’re not guaranteed, however, the current projections, might not pan out due to market and interest fluctuations over the life of a policy.

And over the life of that policy, you’ll be paying premiums. Those premiums may never bring you to a breakeven point where your payments match the value of your life insurance contract. Your money simply — poof — disappears, and your policy isn’t worth what you paid into it. Additionally, those premiums take away from your ability to take advantage of other opportunities, like saving and investing in your 401(k) or Roth IRA.

The fix? Even if you’ve sunk more money into your insurance than it’s currently worth, you can still cash out. Start by obtaining a replacement term life insurance policy first so you don’t have a gap in coverage. Next, it’s important to analyze your policy to understand if you’re coming up to a breakeven point, moving further away from one, or if you’ll never get there to make the best decision about whether and when to surrender your policy.

And after that? Many life insurance companies don’t charge surrender fees. If the cash value of your policy is less than what you’ve paid in, aka your cost basis, you have no taxable gain to pay if you surrender your policy. And if you do have taxable gain? That means your policy is worth more than you put into it (lucky you!), and you’ll just pay regular income tax on the difference.

A life insurance loan is another option, where you borrow from the cash value of your policy tax-free. While a loan reduces the policy’s death benefit if you don’t repay it, borrowing in this way allows you to keep your policy active.

If you’re at the starting point and considering purchasing a permanent life insurance product, it’s important to understand how the agent selling you the insurance gets paid. If they’re providing you with a “free” financial plan that leads you toward permanent insurance, ask them the dollar value of their compensation so you can get a good idea of how much your free plan is worth — and if its value matches that price point.

Or begin with an unbiased opinion of whether you need life insurance, how much, and what type.

Annuities

Ahh, annuities. Never outliving your money certainly does sound promising … but, of course, that guarantee comes at a cost.

Beginning with the basics, an annuity is an insurance product that you purchase to provide you with an income stream. That income can begin right after your purchase or at some point in the future, where waiting can allow the annuity to grow tax-deferred until payments begin. You can pay for it all at once or in installments, and the payments can be fixed or they can fluctuate based on the performance of the annuity’s underlying investments. While annuities come in many different flavors, the idea is guaranteed income.

Some pay for a certain period of time, like 10 years. Others start at a known date, like age 70, and pay until an unknown date, like until death. Some annuities pay you and your spouse but change in amount when one of you passes away. And other annuities can pay out for your lifetime and leave a benefit to someone else upon  your death.

To provide that income guarantee, insurance companies that sell annuities include certain caps. A fixed annuity pays out the exact same amount for a guaranteed period of time. With variable and indexed annuities, the company caps the downside so you can’t receive payments lower than a certain amount if the annuity’s underlying investments perform poorly … but they also cap the upside. That means, even when those underlying investments are doing well, your annuity doesn’t earn as much as you could have if you’d invested in the same thing in the stock market. The tough thing about annuities is that you pay for the guarantee — and you risk paying more for the annuity than you get out of it.

Annuity commissions can be quite large, and surrender charges for getting out of an annuity contract can be, too. Considering an annuity? Don’t let free financial advice that threatens you with running out of money during your lifetime push you toward a quick decision. Instead, take the time you need to understand how you might all but guarantee that you’ll protect yourself from running out of money. Get an unbiased second opinion before purchasing an expensive product that you might not need.

Investment Products

Investment products are ubiquitous. Heck, Jason uses investment products like stocks, bonds, treasuries, mutual funds, and ETFs to build portfolios for clients like you. But some are fee-heavy as opposed to the low-cost options that Jason considers.

So, what are some high-cost investment products? Investments that cost you money to buy, hold, and sell, like front-end loaded mutual funds, more actively managed funds, and proprietary or “captive” funds, to name a few. All mutual funds have fees, but some mutual funds can have higher fees or loads that cost you more to buy or sell one fund as opposed to another. With all mutual funds, you’re paying for the fund manager to manage and market the funds. Similarly, in an actively managed fund, you pay a fund manager to manage the fund and keep it (in theory) ahead of the index it’s tracking. Proprietary or captive funds are ones that a certain brokerage calls its own. They may come with higher fees, and you might not be able to transfer these funds to another custodian because of their proprietary nature.

On the flip side, no-load mutual funds and passively managed or “index” funds may present lower-cost options. The lower costs, when compared to higher-fee counterparts, can leave more money in investors’ pockets when they sell the funds. To learn more about how fees can eat away at your returns, check out the Financial Industry Regulatory Authority (FINRA) course, Your Main Squeeze: Fees and Expenses.

When the stock market has historically increased by around 10 percent annually in the last 100  years, you may think, “Why would I pay fees?” You might not choose to, but the person choosing investments on your behalf might as they may receive a commission for doing so. And if you’re coming to FPFoCo from such a broker, we might have a little unwinding to do to get you out of those investments.

If we’re managing your investments, we’ll implement a tax-savvy plan to get you out of any pricier funds some free advice may have gotten you into. And if you’re working with an outside investment manager, have us review your portfolio. We can help you understand if you could achieve an equivalent investment mix with lower fees.

Unbiased Financial Planning & Peace of Mind with FPFoCo

As an FPFoCo client, you already know that we’re not in the business of selling insurance products or high-fee investment vehicles, and we don’t accept commissions, kickbacks, or referral fees. You may have even come to us from someone who was paid in an unclear way. You might have been charged a fee that you didn’t realize you were paying — or you may not have known you were paying as much as you were.

Now that you’re here, you might be wondering why we told you about what to avoid. You know you’re in good hands with FPFoCo! Well, it’s because we know that you hear about these products in advertisements, and we also may suggest that you purchase certain types of insurance products from outside sources.

We’re glad you’re here. And we’re happy to be here for you with unlimited meeting and consultation time. So if you’re considering making a purchase from an outside source, ask us about it or send some information our way for analysis. As Your Full-Time Fiduciary®, we’ll share our unbiased opinion and let you know whether it’s in your best interest and if you’re better off avoiding it than adding it to your financial picture.